Fiscal federalism

Fiscal federalism is a system of transfer payments or grants by which a federal government shares its revenues with lower levels of government.

Federal governments use this power to enforce national rules and standards. There are two primary types of transfers, conditional and unconditional. A conditional transfer from a federal body to a province, or other territory, involves a certain set of conditions. If the lower level of government is to receive this type of transfer, it must agree to the spending instructions of the federal government. An example of this would be the Canada Health Transfer. The second type of grant, unconditional, is usually a cash or tax point transfer, with no spending instructions. An example of this would be a federal equalization transfer.

It may be noted that the ideas of fiscal federalism are relevant for all kinds of government "viz" unitary, federal and confederal. [( see for example: King, 1984, Grornrndijk, 2002:1).] The concept of fiscal federalism is not to be associated with fiscal decentralization in officially declared federations only; it is applicable even to non-federal states ( having no formal federal constitutional arrangement) in the sense that they encompass different levels of government which have defacto decision making authority [( Sharma, 2005a: 44)] . This however does not mean that all forms of governments are 'fiscally' federal; it only means that 'fiscal federalism' is a set of principles, that can be applied to all countries attempting 'fiscal decentralization'. In fact, fiscal federalism is a general normative framework for assignment of functions to the different levels of government and appropriate fiscal instruments for carrying out these functions [(Oates, 1999: 1120-1).] The questions arise: (a) How federal and non-federal countries are different with respect to 'fiscal federalism' or 'fiscal decentralization' and (b): How fiscal federalism and fiscal decentralization are related ( similar or different)? Chanchal Kumar Sharma [(2005a, 2005b)] clarifies: While "fiscal federalism" constitutes" a set of guiding principles, a guiding concept", that helps in designing financial relations between the national and subnational levels of the government, "fiscal decentralization" on the other hand is "a process of applying such principles" [( Sharma,2005b: 178)] . Federal and non-federal countries differ in the manner in which such principles are applied. Application differs because unitary and federal governments differ in their political & legislative context and thus provide different opportunities for fiscal decentralization [(Sharma, 2005a:44)] .

Fiscal Federalism Network

[http://www.oecd.org/department/0,3355,en_2649_35929024_1_1_1_1_1,00.html OECD Network on Fiscal Relations Across Levels of Government]

The relationship between central and subcentral government bodies has a profound effect on efficiency and equity within the government and on macroeconomic stability of the country. The role of the OECD Network on Fiscal Relations Across Levels of Government is to provide data and analysis on these relationships between organizations at different levels of government. [ http://www.oecd.org/department/0,3355,en_2649_35929024_1_1_1_1_1,00.html “Fiscal Federalism Network,” OECD Centre for Tax Policy and Administration, OECD.org, 17 July 2007 ]

ee also

*Fiscal imbalance

References

Groenendijk, Nico. 2002. 'Fiscal federalism Revisited' paper presented at Institutions in Transition Conference organized by IMAD, Slovania Ljublijana.

King, David. 1984. Fiscal Tiers: The Economics of Multilevel Government, London: George Allen and Unwin.

Oates, W.E. 1999. 'An Essay on Fiscal federalism', Journal of economic Literature, 37(3):1120-49.

Sharma, Chanchal kumar.2005a 'When Does decentralization deliver? The Dilemma of Design'," South Asian Journal of Socio-Political Studies"6(1):38-45.

Sharma, Chanchal Kumar.2005b. [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=945949] 'The Federal Approach to Fiscal Decentralization: Conceptual Contours for Policy Makers', "Loyola Journal of Social Sciences", XIX(2):169-88 (Listed :International Bibliography of Social Sciences, London School of Economics and Political Science)